Solving Britain’s Productivity Problem

On 2nd December, Virgin Trains East Coast announced that in 2017 it intended to increase rail fares on average by 4.9%. Although season and off-peak return fares, which are government-set, are to rise by 1.9%, the fares that Virgin control will rise by an average of 5.5%.[1] With such high increases in the cost of rail travel, which no doubt will hinder the geographical mobility of Britain’s workforce, transport is only one of several problems that hold back Britain’s productivity.

An economy’s productivity is of crucial importance in underpinning a country’s prosperity and international competitiveness. A lack of productivity means the cost of producing goods and services is higher than otherwise it would be, meaning the price of its exports are higher than they could be. This contributes to Britain’s unsustainably high current account deficit. The UK’s deficit with the rest of the world in 2016 rests at around seven per cent of GDP.[2]Paying for the current account deficit usually entails eating into the UK’s financial account (for example, the dividends British investors earn from asset portfolios based abroad) or, alternatively, borrowing from foreign creditors. In either instance, inevitably the country is made poorer in the long-term. Furthermore, low productivity depresses real wages, so that UK workers work longer hours for less pay than their counterparts elsewhere. In his fairly recent autumn statement, the chancellor, Philip Hammond commented it takes a German worker four days to produce what a UK worker does in five.[3] Britain’s productivity problem is therefore chronic, something that potentially may become considerably more severe in the wake of Brexit, especially if negotiations with the remaining European Union members sour and a trade-off takes place with greater border control is prioritised at the expense of single market access.

How do the UK’s policymakers fix Britain’s productivity plight? One obvious policy prescription might be to increase government spending on infrastructure. Indeed, much of this is planned for the following few years, with £23 billion set aside in the autumn statement for improving physical infrastructure, including on rather mundane aspects of transport, such as new railway signalling, increasing internet connections and filling in potholes.[4] These plans may improve productivity to some extent, if, for example, it allows workers to move more quickly and easily to work or (in the case of internet connectivity) allows for information to flow between businesses.

However, this is a tried-and-tested policy, repeated ad nauseam. To some extent, its impact will be limited, due in part to the fact that the sums proposed are meagre. With the state expected to borrow £122 billion more over the next five years thanks to Brexit, the amounts invested in infrastructure are likely to continue to be small.[5] Furthermore, as the development economist Ha-Joon Chang points out, the impact technological change has on productivity in the Western world is less substantial than it was a century ago. [6] This means industrialised economies will benefit less from improvements in their physical infrastructure than countries which continue to be developing and industrialising.

What is instead needed is a fundamental change in corporate culture, one that is not only driven by the pursuit of private profit, but one that reflects the various interests of several stakeholders. When Theresa May became prime minister, she promised that Britain’s corporate culture would change for the better, with consumer and worker representatives on company boards influencing their decision-making. Yet, it seems that this promise is already being backtracked on; May commented in late November that for some companies it may be better for workers and consumers to partake in advisory panels separate from company boards rather than have representatives directly influencing executive decisions.[7] This is a mistake. Participation of several different stakeholders in corporate decision-making other than owners and managers minimises the risk of conflict over the deal workers, suppliers and customers get from the businesses that affect their lives daily.[8] This will only promote productivity with fewer strikes and secure supply chains. What is more, it may reduce the damaging levels of economic inequality in British society today. As workers are in a position to demand better pay and conditions thanks to their increased ability to be more vocal, the gulf between the haves and the have-nots will surely shrink. With this, as the sociologists Richard Wilkinson and Kate Pickett point out, levels of productivity in this country will dramatically improve through a myriad of factors, from better physical and mental health to greater social mobility to lower crime rates.[9]

Moving away from our current model of corporate governance to one that meets the needs and interests of the several groups that are affected by company decisions everyday would prove to be beneficial to the UK economy, raising it from its current lull in productivity. It would certainly have a bigger impact than a cheaper rail ticket.

Nick Naylor is a final year undergraduate in History at King’s College London, and has previously contributed to the King’s Think Tank publication The Spectrum.